Why Carpetright plc Could Be A Star Performer Next Year!

Today’s interim results release from Carpetright (LSE: CPR) has received an overwhelmingly positive reaction from investors, with shares in the company being up 12% at the time of writing. That’s no great surprise, since the company now expects its results for the full year to come in at the upper end of market forecasts, which is clearly great news for investors and shows that Carpetright is making encouraging progress.

Evidence of this can be seen in the update, with revenue growth of 2.6% and an increase in underlying profit of 123.3% being a big step in the right direction after numerous profit warnings over the last couple of years. Clearly, gross margins remain under pressure, as Carpetright stays relatively competitive on price during a challenging period for disposable incomes, although its turnaround plans under new CEO, Wilf Walsh, appear to be delivering on their potential, with more to come over the medium term.

Future Potential

Clearly, Carpetright remains a turnaround story and, as mentioned, it is not long since profit warnings were an all too frequent occurrence for investors in the company. However, with wage rises set to outpace inflation in 2015 (for the first time since the start of the credit crunch), Carpetright could be on the cusp of a much more profitable period.

Certainly, the market seems to think so. For example, Carpetright is expected to deliver earnings growth of 118% in the current year, followed by a further 34% next year. Both of these figures are extremely impressive and, although they may be subject to change in future months as the company embarks on a major turnaround plan that should help to more closely align Carpetright’s offering with customer tastes, the current share price seems to include a significant margin of safety in that respect.

For instance, while Carpetright trades on a price to earnings (P/E) ratio of 33, its forecast growth rates for the next couple of years mean that its price to earnings growth (PEG) ratio of just 0.7 indicates growth is on offer at a very reasonable price. As such, it could see its share price rise over the coming year as investors begin to price in a potentially higher bottom line.

Sector Peers

Of course, an improving outlook for disposable incomes is good news not just for Carpetright, but for sector peers including Next (LSE: NXT) and Dunelm (LSE: DNLM). They are also forecast to increase their bottom lines at impressive rates, with Next’s earnings due to be 10% higher next year and Dunelm’s set to be 8% greater than they were last year. However, where they lack appeal relative to Carpetright is in terms of their valuations, with them having PEG ratios of 1.5 and 2.2 respectively.

Of course, both Next and Dunelm are more stable businesses than Carpetright and, looking ahead, offer greater earnings visibility simply because they are not undergoing such a significant turnaround plan. However, with a generous margin of safety included in its share price, Carpetright could be worth buying at the present time and, looking ahead to next year, could prove to be a star performer.

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Peter Stephens has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.